Yes Bank Ltd. Company Profile. Investment Rationale. April 4, Knowledge banking a key differentiator

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1 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 April 4, 214 Yes Bank Ltd Knowledge banking a key differentiator CMP: Rs.412 Target: 515 Initiating Coverage - Buy Key Share Data Face Value (Rs.) 1 Equity Capital (Rs. in Cr.) 36.1 M.Cap (Rs. in Cr.) 14, wk High/Low 547/216 One Year Avg. Daily Vol (In Qty) 11,61,125 BSE Code NSE Code YESBANK Reuters Code YESB.NS Bloomberg Code YES:IN Shareholding Pattern (as on 31 st Dec, 213) Source: BSE Key Financials (Rs. In Cr.) Particulars FY13 FY14E FY15E FY16E NII NIM (%) 2.7% 2.8% 2.8% 2.8% Other Income Total Income Op. Profit PAT growth (%) 33.1% 18.9% 21.3% 29.9% EPS (Rs.) Adj.BV (Rs.) Key Financials Ratio Particulars FY13 FY14E FY15E FY16E P/BVPS (x) P/E (x) ROACE (%) ROAE (%) Net NPA (%) CASA (%) 41.9% 41.3% 35.7% 36.4% Spread (%) 2.1% 2.3% 2.4% 2.4% Price Performance Yes Bank vs. Bank Nifty Bank Nifty Yes Bank 3% 1% -1% -3% -5% DIIs 19.26% Public 15.62% FIIs 39.56% Promoter 25.56% Company Profile India's new age private sector Bank, is an outcome of the professional entrepreneurship of its founder, Rana Kapoor. It is a complete service commercial bank with corporate, SME & retail banking, and has a comprehensive product bouquet comprising of financial markets, investment banking, business and transaction banking and wealth management. The Bank has a network of 517 branches with 1,158 ATM Network in India. Investment Rationale Well diversified loan portfolio across major industry segment Yes Bank s total credit book as on 9m FY14 stood at Rs.5,293cr. Such an exceptional growth rate in the loan book was backed by the large and mid corporate clients which contributes more than 8% of advances. The bank doesn't have more than a 5% exposure to any sector. Moreover, over 9% of its corporate lending is towards meeting working capital requirement of its clients. These are typically shorter term loans where the risk of default is less. Therefore, Overall reported asset quality indicators of the bank remained under control. Gross NPA and Net NPA stood at.39% and.8% respectively as on Q3 FY14. We believe, the bank s focus towards retail business along with the offtake of past project sanctions and working capital demand by the corporate may help it to deliver their advances growth of ~23% and ~26% in FY15E and FY16E respectively. Growth momentum in CASA is likely to continue Yes Bank has planned to concentrate on higher deposit mobilization in terms of CASA to manage the cost of fund at the lower level. Yes Bank s total deposit base has grown above the industry growth rate during FY8 to FY11 but in FY12 and in the current year FY14 the bank has registered a poor growth in deposit YoY due to the overall economic slowdown. In spite of low deposit growth, Yes Bank has managed to increase its CASA deposit from mere 1% in FY11 to 2.9% in Q3 FY14. We expect the deposit base to increase at 16% CAGR over FY13-16E to Rs.15,553 cr considering the system wide slowdown in deposits and expect CASA ratio to be at 26% by FY16E. Non interest income continues to aid top line growth Yes Bank s non interest income has grown by 29% CAGR over FY8 13. The Bank s focus on branch banking and its strategy to mobilize SME clients has helped the bank to garner a large chunk from its transaction banking and financial advisory services. We expect a CAGR growth of 27% in non-interest income over FY13-16E likely driven by sustainable transaction banking revenues, healthy pipeline of advisory services and growing focus on third party distributions. Outlook & Recommendation At CMP, the stock trades at a P/BV of 2.1x FY14E, 1.7x FY15E and 1.4x FY16E. We initiate coverage on the stock with BUY recommendation and a target price of Rs.515 (1.75x FY16E ABV), at 25% upside over the period of 15 month. Analyst: Chirag K. Gothi Tel No.: ; Mobile: chirag.gothi@skpmoneywise.com SKP Securities Ltd Page 1 of 11

2 Yes Bank The new-age private sector bank Yes Bank was incorporated in November 23 and received its Banking license in May 24. It commenced its operations with an initial capital of Rs.2cr. The bank is promoted by Dr. Rana Kapoor and Late Mr. Ashok Kapur and led the banks growth story. Yes Bank is professionally managed under the overall guidance of the efficient team at the top that includes eminent individuals with wide experience in financial services. Yes Bank is amongst the top five private sector bank with an assets size of more than ~Rs.1bn. Since inception Yes Bank has outperform the industry growth rate in all segment with its new technology and service driven approach in its preplanned road map. Mr. Rana Kapoor was conferred with The Asian Banker CEO Leadership Achievement Award for India for significant achievements in the period , which is the highest award for individual achievement in the banking industry in Asia Pacific region today, and YES BANK was conferred the Best Managed Bank in India honour. These awards which are held only once in every 3 years were presented in a ceremony that saw the recognition of over 2 Top Financial Institutions across Asian countries. It is a complete service commercial bank with corporate, small and medium enterprises (SME) and retail banking, and has a comprehensive product bouquet comprising of financial markets, investment banking, business and transaction banking and wealth management. Yes Bank operates 517 branches across India and expect to grow this network anywhere between 1 to 15 branches in the next 12 to 15 months. The bank also expects staffing to grow from about 3, to 12, by FY16. This incremental branch expansion will further propel Retail/SME Banking initiatives. Yes Bank has a balance sheet size of Rs. 11,388 crs with a total business (advances & deposits) of Rs. 118,353 cr as on Q3 FY Business growth % 71% 64% 31% 22% 24% 9% 1% FY1 FY11 8% 7% 6% 5% 3% 2% 1% % SKP Securities Ltd Page 2 of 11

3 37,989 47, 55,53 67,764 85,517 Investment Rationale Well diversified loan portfolio across major industry segments The credit traction has been strong at 28% CAGR in the past five years and way ahead of the industry, which grew at 17% CAGR. Yes Bank s total credit book as on 9m FY14 stood at Rs.5,293cr. Such an exceptional growth rate in the loan book was backed by the large and mid corporate clients which contributes more than 8% of advances. The bank follows unique knowledge based approach that provides customers with well-informed and customized solutions. The key knowledge capital sectors include food and agribusiness, life sciences, media and entertainment, information technology, telecom, infrastructure, light engineering, hospitality, healthcare and education. The bank doesn't have more than a five per cent exposure to any sector. Moreover, over 9% of its corporate lending is towards meeting working capital requirement of its clients. These are typically shorter term loans where the risk of default is less. However Yes Bank s recent focus to increase retail and micro SME credit has gradually shifting the loan portfolio towards that business and as a result, bank s retail loan book contributes ~18.2% of the total loan book in FY13, which was mere 5.3% in FY1. Proportion of micro SME and retail loan will increase in the next two years. We believe, the bank s focus towards retail business along with the offtake of past project sanctions and working capital demand by the corporate may help it to deliver their advances growth of ~23% and ~26% in FY15E and FY16E respectively. Rs. in Cr Loan Book and Growth (%) Advances growth % 23.7% 23.1% 17.1% 1.5% 3% 26.2% 25% 2% 15% 1% 5% % Loan Book Break-up Large Corporates Mid-sized Corporates Retail Banking 8% 69.1% 7% 65.% 6.2% 64.7% 68.% 6% 5% 3% 25.6% 22.9% 21.6% 18.2% 17.3% 2% 18.2% 17.1% 12.% 14.7% 1% 5.3% % FY1 FY11 FY12 FY13 9m FY14 SKP Securities Ltd Page 3 of 11

4 ,152 66, , , , Growth momentum in CASA is likely to continue On the deposit front, Yes Bank s deposits have also witnessed sharp traction of 23% CAGR over FY8-13 to Rs.66,955cr and way ahead of the industry, which grew at 17% CAGR. Yes Bank has planned to concentrate on higher deposit mobilization in terms of CASA to manage the cost of fund at the lower level. Yes Bank s total deposit base has grown above the industry growth rate during FY8 to FY11 but in FY12 and in the current year FY14 the bank has registered a poor growth in deposit YoY due to the overall economic slowdown. Inspite of low deposit growth, Yes Bank has managed to increase its CASA deposit from mere 1% in FY11 to 2.9% in Q3 FY14. Yes bank has aggressively expanded branches from 117 in FY9 to 517 branches during Q3 FY14, notably the bank opened with 36% CAGR. As, a strategically move the bank has increased its focus on Metros and Semi- Urban parts of the country, which is highly untapped so far, to improve on its CASA Ratio which stood at 2.9%. The surge in CASA, gives Yes Bank, the much needed access to low cost deposits, in the prevailing high interest rate scenario. The bank is using B2B and B2C model to build CASA base on its new branches as well as existing branches. The management expects to grow this network anywhere between 1 to 15 branches in the next 12 to 15 months. On the back of saving rate deregulation in October 211,the bank has increased its saving rate from 4% to 7% on savings deposit above Rs.1 lac (6% in deposit below Rs.1lac) to attract new customer base. This scheme has banged well on the target and helped the bank to acquire new clientele in the form of higher corporate accounts and other savings accounts. We expect the deposit base to increase at 16% CAGR over FY13-16E to Rs.15,553 cr considering the system wide slowdown in deposits and expect CASA ratio to be at 26% by FY16E. Deposit and Growth (%) Proposition of CASA (%) Rs. in Cr Deposit growth % 36.2% 35% 3% 25% 22.% 22.4% 2% 15% 1% 7.% 5.6% 5% % Rs. in Cr CASA as a % of Deposit 23.5% 21.5% 18.9% 15.% 3% 25.5% 25% 2% 15% 1% 5% % SKP Securities Ltd Page 4 of 11

5 Diversified book leads to superior asset quality Despite strong loan growth, Yes bank has been able to maintain robust asset quality over the years. Overall reported asset quality indicators of the bank remained under control, though some increase was seen in Q3 FY14. Gross NPA and Net NPA stood at.39% and.8% respectively as on Q3 FY14 compared to.2% and.1% respectively as on FY13. In absolute numbers, the Gross NPA levels of the bank has increased to Rs. 196 cr as on Q3 FY14 from Rs. 94 cr as on FY13. Yes Bank follows a strong internal rating for its credit exposure and act proactively for any kind of stress observed in the quality of asset. As mentioned earlier, banks major part of the lending towards working capital funding, further mitigate the risk related project funding. Net Restructured assets of the bank have remained low for the bank at ~.21% of the Gross Advances as on Q3 FY14. The bank has sold some of the NPA accounts to asset reconstruction companies in 9m FY14. We expect absolute GNPA and NNPA of Rs.89cr and Rs.243cr, respectively, as on FY15E. Despite this, Yes Bank s asset quality remains manageable and appears better than the industry Gross NPAs% Net NPAs% Prov. coverage (%) FY1 FY Higher Capital Adequacy Ratio (CAR) to support growth Yes Bank is in well position to support its growth trajectory with 17.8% of Capital Adequacy Ratio (CAR), which is better placed amongst its peers. Similarly, the bank s tier I capital stood at 9.9%, which is higher than that of peers. Yes Bank s ability to raise capital at premium valuation at regular interval bodes well for its future growth. With such a strong capital base, Yes bank is all set to support its growth plans going forward. 14.% 12.% 12.8% CAR Tier I 1.% 9.7% 9.9% 9.5% 1.2% 1.3% 1.2% 8.% 6.% FY1 FY11 SKP Securities Ltd Page 5 of 11

6 Non interest income continues to aid top line growth Yes Bank s non interest income has grown by 29% CAGR over FY8 13. This was largely driven by new product offerings. Yes Bank has well diversified non-interest income base, which includes Financial advisory (Investment Banking, Corporate Finance advisory and other advisory income: 34%), Financial markets (FX sales, Debt Capital Market and trading income: 33%), Retail (Branch banking & other fees: 1%) and Transaction banking (23%) as on 9mFY14. The Banks strategy to cross sell wide range of financial products and services by leveraging the existing client relationships is likely to boost profits through fee and fund based income going forward. The Bank has witnessed a strong growth in its revenue from transaction banking and financial advisory services (as can be seen from the graph below). The Bank s focus on branch banking and its strategy to mobilize SME clients has helped the bank to garner a large chunk from its transaction banking services. The revenue from transaction banking are quite recurring in nature and is likely to provide some stability to the non interest income stream as revenue from financial markets and advisory business is volatile and is dependent on market conditions. On the advisory front, with the outlook on equity markets and macro-economic prospects improving fees from various advisory services are expected to improve at the end of FY14. We expect a CAGR growth of 27% in non-interest income over FY13-16E likely driven by sustainable transaction banking revenues, healthy pipeline of advisory services and growing focus on third party distributions. Financial Market business would also grow at a healthy pace due to possible revival in capital markets. Break-up of Non interest income 1% 8% 6% Financial Advisory Financial Markets Transaction Banking TPD, Retail, Others 8.7% 1.5% 1.8% 11.1% 11.% 27.6% 25.7% 23.3% 23.9% 23.6% 21.3% 2.1% 29.5% 29.1% 29.9% 2% % 42.4% 43.7% 36.4% 35.9% 35.5% Proposition of Non interest income Rs. in Cr % Non Interest Income 36.2% 38.5% as % of Net Total Income 39.4% 4.1% 42% 38% 36% 34% 5 32% SKP Securities Ltd Page 6 of 11 3%

7 Rs. in Cr % Strong Financial Performance Stabilize its NIM at 2.8% during FY13-16E: In view of recent liquidity tightening and increased cost side pressure, Yes Bank has shown exemplary performance in recent past to pass on the increase in cost and has never taken hit on the margins like other banks. Going ahead, as retail banking gains momentum, the bank will be able to focus on enhancing its yield on assets (yield from retail assets is higher) and contain its cost of funds (with accesses to CASA deposits) which will in turn stabilize its NIM at 2.8% during FY13-16E. Revenue break up segment wise % Revenue in value and Growth % Net Interest Income growth (%) 37.3% 21.9% 17.3% 35% 3% 22.5% 25% 2% 15% 1% 5% % Looking at improve its Cost to Income ratio to 37%: Cost to Income ratio increased in 9m FY14 to 38.66% as compared to 38.4% in FY13 and 37.7% in FY12. While, new branch additions will keep adding to cost pressures, the higher revenues generated from the older vintage branches will enable the bank maintain below over the last four years. This coupled with a strong top line and non interest income growth will result in a decline in Cost/Income. We expect Yes Bank would able to improve its Cost income ratio at the current level of 38.66% to 37%. Cost to Income ratio (%) PAT and Growth % Cost of funds (%) Yield on advances (%) NIM (%) Rs. in Cr Operating expenses Cost to income ratio 41% 39% 39% 39% 38% 38% 38% 38% 37% 37% 37% 5 36% 36% 35% Rs. in Cr PAT growth % 34% 33% 21% 19% 3% 35% 3% 25% 2% 15% 1% 5% % SKP Securities Ltd Page 7 of 11

8 Consistent higher RoAE & RoAA: Yes Bank has consistently delivered higher returns during last five years with RoAE greater than 2% and RoAA in the range of 1.5% to 1.6%. As RoAE is a function of profitability and leverage on assets, we expect Yes Bank s profitability to follow the current northward trend and help the bank to achieve a RoAE 25% in FY16E. Du-Pont analysis ( Base of RoE) % of Avg. Assets Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Net interest income Non-interest income Net Total Income Operating Expenses Operating Profit Provs & Contingencies ROAA (%) Leverage (x) ROAE (%) ROAA (%) ROAE (%) Concerns Lower than anticipated CASA movement can have an impact on NIMs. Yes Bank's growth plans are dependent on obtaining branch licenses. Any delays in getting branch licenses from RBI could adversely impact valuations. Deterioration in economic environment could result in lower than expected credit growth, which could hamper the growth prospect of the bank. SKP Securities Ltd Page 8 of 11

9 Valuation: Yes Bank continues to grow at a healthy pace, while maintaining spreads and asset quality. The focus on branch banking and improving CASA ratio augurs well for the bank. We expect Yes Bank to at least maintain the current NIMs of over 2.8% with the positive upward bias (depending on the branch roll out, increasing CASA ratio and growing share of retail advances). At CMP, the stock trades at a P/BV of 2.1x FY14E, 1.7x FY15E and 1.4x FY16E. We estimate that Yes Bank will report an EPS CAGR of 23% over FY13-16E. ABV is estimated to grow at 22% CAGR during the same period. Hence, we initiate coverage on the stock with BUY recommendation and a target price of Rs.515 (1.75x FY16E ABV), at 25% upside over the period of 15 month. 1 year forward P/ABV Band Rs. Price 1.X 1.5X 2.X 2.5X 3.X Apr-7 Mar-8 Apr-9 Apr-1 Apr-11 Apr-12 Apr-13 Source: SKP Research SKP Securities Ltd Page 9 of 11

10 Financial Performance: Income Statement Figures: Rs. in Cr. Particulars Interest Earned Int. on Advance Inc Investment Int. on Balances Others Interests Interest Expended NII Transaction Banking Financial Markets Financial Advisory TPD, Retail, Others Non Int. Income Net Total Income Employees cost Oth Operating Exp Operating profit Provisions PBT Taxes PAT EPS DPS DP ratio Balance Sheet Figures: Rs. in Cr. Particulars Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E Share Capital Reserves Net Worth Deposits Borrowings Oth liabs & prov Total Liabilities 73, , , , ,445.1 Cash & Bank bal Investments Advances Fixed assets Other assets Total Assets 73, , , , ,445.1 Source: Company Data, SKP Research Ratio Analysis Particulars Growth ratios (%) Deposits Advances Total Assets Interest Income Interest Expenses NII Other Income Net Profit Spread Analysis (%) Yield on advances Yield on investment Yield on assets Cost of deposits Cost of borrowing Cost of funds Spread NIM Asset quality (%) Gross NPAs% Net NPAs% Prov coverage (%) CAR Tier I Valuation ratios ROAA (%) ROAE (%) P/E Price/Book Value Price/Adj. BV EPS (Rs.) BV/sh (Rs.) Adj. BV/sh (Rs) SKP Securities Ltd Page 1 of 11

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